Have I Got a Proposition For You

California's tax revolt, 30 years on.

Arnold Steinberg

June 9, 2008, Vol. 13, No. 37

Thirty years ago, this week, California voters started a taxpayer revolt that quickly spread to other states, helped set the stage for President Ronald Reagan's income tax cuts, and inspired an entire generation of diehard opponents of big government. While the rest of the country slept through the Carter presidency, hundreds of thousands of Californians participated in a true grassroots petition campaign to place an initiative on the June 1978 ballot. And then they voted for this historic measure, Proposition 13, to amend their state constitution to limit property taxes.

Prop. 13 limited (a) taxes on real property to 1 percent of value, and (b) increases in property taxes to 2 percent annually. In simple terms, a home worth $500,000 could be taxed up to $5,000, and, in the event that the value of the home went up, those taxes could increase by no more than $100 (i.e., 2 percent of $5,000) in year one, then $102 (2 percent of $5,100) in year two, and so forth. For good measure, Prop. 13 went beyond property tax reform--for an increase in local general taxes, it required the approval of local voters, and for an increase in state taxes, it required a two-thirds majority in the state legislature. The logic was compelling. Howard Jarvis, Prop. 13's creator, felt that if you limited property taxes but did not otherwise inhibit government, it would raise other taxes promiscuously.

Early on, I urged my client, Attorney General Evelle Younger, a candidate for governor in the Republican primary that June, to endorse Proposition 13. I argued that even if it lost, it would win handily among Republicans, and he needed them in the primary. And if it won, it would probably do so broadly, and he needed to expand his base for the general. One of Younger's impressive primary opponents, San Diego mayor Pete Wilson, like most mayors, opposed Proposition 13 as fiscally imprudent.

Partly because of his support of Prop. 13, Younger won the June 6 primary. Against my counsel, he then took an immediate vacation to Hawaii. Meanwhile, Governor Jerry Brown, who had campaigned vigorously against Prop. 13, turned on the proverbial dime: He immediately, wholeheartedly embraced its implementation. By Election Day in November, confused voters credited Prop. 13's opponent, the Democrat Brown, with championing lower taxes and, accordingly, reelected Governor Moonbeam.

For most California Republicans, though, 13 turned out to be a lucky number. In November 1978, a host of young Republican candidates ("Prop. 13 babies") won seats in the state legislature and then advanced politically as conservative prospects improved. Republicans George Deukmejian and Pete Wilson (who always supported Prop. 13 after 1978) were elected governor and reelected (1982, 1986, 1990, 1994). Fast forward to the 2003 recall of Democrat Gray Davis. During the campaign, challenger Arnold Schwarz-enegger brought Warren Buffett for a staged fiscal summit. The billionaire investor made big news in urging a remake of Prop. 13; fearing implosion of his campaign, Schwarzenegger publicly disowned Buffett, who quickly disappeared from Schwarzenegger's entourage. The Terminator could not hint at terminating Prop. 13.

For all its subsequent popularity, Prop. 13 was never an electoral certainty. Howard Jarvis had tried and failed with similar measures. And Prop. 13 at first seemed headed for defeat. Big business allied with politicians in both parties, along with police, firefighters, teachers, and all the usual suspects in a lavish campaign to kill it. They provided a "moderate" alternative, Proposition 8, that would have trumped 13 if it had received more votes. But just weeks before Election Day, home-owners across the state received their reassessments, which were substantially higher and thus foretold huge property tax hikes. Then a late revelation of a sizable state budget surplus undercut the main rationale for opposing Prop. 13--that the state needed revenue. In the end, voters repudiated the hysterical anti-Prop. 13 ad campaign which suggested that, if not the world, then the state's government would come to an end if deprived of higher property tax receipts.

Jarvis's campaign focused on home-owners, but business has been quite the beneficiary as Prop. 13 treats business and residential property the same. Yet the state's largest corporations led the charge against Proposition 13. They bought into the argument that, if Prop. 13 passed, government would be so starved it would be unable to provide basic services. California, the line went, would become a statewide ghost town, bereft of such public necessities as policing, firefighting, and schooling. Corporations would leave, new enterprises would not start or move here. Employment would fall, so consequently would public revenue, in an endless cycle of decay.

Prop. 13 detractors are still saying these things. Howard Jarvis, who died in 1986, would love that they're still whining about his mischief. He was a sort of precursor to Ross Perot, but of decidedly modest means. In his own way, he told people to look under the hood. Things were not that complicated, he maintained. Jarvis was the consummate anti-politician who appealed to this populist preoccupation: Government does not need more money, it merely must stop wasting what it has.

Jarvis was crusty and fiercely independent. He felt more comfortable among Republicans but was hardly a party man. In fact, he tilted toward Jerry Brown in the general election. That's because he went with the power, and Brown assured him he would faithfully implement Prop. 13.

Jarvis was involved with an association of apartment owners, many of whom were not wealthy but middle-class, owning a few units the income from which they were counting on in their retirement. But to Jarvis, Prop. 13 was about much more than limiting property taxes on apartment buildings; it was the fiscal embodiment of "a man's home is his castle." Jarvis felt, and rightly so, that longtime homeowners, especially the retired and elderly, were being forced out of their homes because property taxes were rising at a seemingly uncontrollable and unpredictable rate.

For government expansionists, Prop. 13 represents all that is wrong with the conservative movement. They have chafed at its restraints for more than a generation. Because of it, they feel, people in the Golden State are denied the public sector resources necessary to provide vital services and to fund public education adequately. But California has done quite well since 1978. If Prop. 13 really has bankrupted state, county, and city government here, then why didn't Silicon Valley move elsewhere?

The truth is, it's hard to imagine California without Prop. 13, or to argue the state would be better off without it. After all, is it so tragic that people who own a home can look into the future and know they will not lose it over runaway property taxes? Gas prices may go up, costly home repairs may be needed, but your property taxes can only increase incrementally each year.

There have been problems for California, to be sure, but these are not the fault of Prop. 13. Lots of people come here. And many, while they contribute to the economy, also claim substantial public services. Immigrants here illegally may benefit consumers or business, but government must fund, for example, the growth in school enrollment.

A study commissioned by the Howard Jarvis Taxpayers Association reviewing the first quarter-century of experience with Prop. 13 found that school district revenue--per student and adjusted for inflation--had increased 30 percent. In that same 1978-2003 period, state government revenue, as a whole, had increased 25 percent; even the revenues of the chronic complainers, city governments, had increased 20 percent--adjusted for inflation and population.

In the three decades since Proposition 13 passed, big business has been less than grateful for its property tax breaks, which disproportionately favor large properties like, say, Disneyland and skyscrapers. Ever courting the state's increasingly liberal state legislature, the corporate interests have funded efforts to undermine 13, such as ballot measures to lower the threshold for approving local special taxes for school funding. In trying to change Prop. 13, they should be careful what they wish for, or they could end up with a "split roll"--a higher tax rate for business property than for residential real estate. After all, the Jarvis coalition was centered not on business, but on homeowners.

Perhaps the most controversial manifestation of Prop. 13 is that it treats different homeowners differently--favoring longtime owners over newcomers. When you buy a home, the purchase price is the assessment, and that assessment (and consequent property taxes) can increase only by 2 percent annually, regardless of real estate appreciation. When you eventually sell it, the new owner is assessed his purchase price, and the process starts again. This means that a new homeowner could be paying two or three times the property taxes of his neighbor, who has lived there a long time. But trying to change this formula could open the door to large increases for everyone. So it has retained popular support.

As time goes by, of course, more and more of the original supporters (many were seniors 30 years ago) disappear from the electorate. I just conducted a study for the Jarvis organization of how California voters view Proposition 13. Although they feel (by 3-to-1) that things in California are on the wrong track, they would vote for Proposition 13 again--by a 2-to-1 margin. It does not do as well among the roughly one-third of the electorate that is "not familiar at all" with Prop. 13. But once they are told of its key provisions, voters opt to keep Prop. 13 as is. Here's to 30 more years.